With more states introducing paid family leave, benefits administrators and human resource directors may have questions about the tax ramifications of paid leave.
As a broker specializing in employee benefits, you probably have similar questions.
While insurance brokers aren’t tax advisors, and shouldn’t act as such, knowing the answers to frequently asked questions can help you establish trust, build rapport, and ultimately, strengthen relationships.
At The DBL Center, we know that relationships are the foundation of growing your insurance business.
You should be prepared to help your clients navigate the new terrain of PFL by answering questions like, “Is Paid Family Leave taxable?”
PFL in New York
Since New York became one of the first states to introduce mandatory paid family leave benefits for most employees, many other states followed their roadmap to introduce their own versions of paid family leave or paid family and medical leave benefits.
You can check out The DBL Center’s PFML Resource Center to learn more about your opportunities to sell paid family and medical leave in a growing number of states.
Just as family and medical leave laws vary in states that mandate this benefit, tax laws surrounding paid leave benefits also vary. For the sake of clarity, this article only covers taxes for PFL in New York.
What Happens When an Employee Files a Paid Leave Claim?
When employees file a claim for paid family leave in New York, they receive checks or direct deposits either from the private insurance company issuing the benefits or from the state fund.
Privately funded paid family and medical leave plans tend to have several advantages:
- Faster, more flexible payouts
- No waiting period in some states
- Better, faster customer service if the claimant has a question
- Online services that make it easier to file a claim
- White-glove service through their insurance broker or carrier
Do Employees Pay Taxes on Paid Leave Benefits?
PFL benefits are taxable in New York. But here’s where it can get complicated: Unlike social security and Medicare taxes, employers do not automatically withhold taxes on PFL benefits.
This can create problems for employees who don’t realize they aren’t paying federal income tax on benefits they receive during their leave.
Whether you’re dealing with the birth or adoption of a new child or caring for a sick family member, withholding taxes are probably the last thing on your mind.
But failure to withhold federal income taxes on paid family leave benefits could lead to a larger-than-expected gross income and a higher tax bill the following April.
Even though beneficiaries might enjoy the advantage of having more money available to spend during that crucial leave time, it can create added stress at tax time if they didn’t realize they were responsible for paying federal, and potentially state, income tax on that money.
How to Have Taxes Withheld for Paid Family Leave (PFL)
Employees can opt to have taxes withheld from their paid leave benefits by filing IRS Form W-4V, Voluntary Holding Request. Employees can request to have any amount of their benefits withheld, and it can help to alleviate their tax burden.
The New York State Insurance Fund reports PFL benefits and taxes withheld on Form 1099-G, Certain Government Payments.
What Are the Employer’s Responsibilities in PFL Reporting?
Employers may be able to deduct their portion of employee benefit premium contributions as a business expense. They also have to report employee contributions to required benefits on Form W-2 in Box 14.
Becoming an Expert on Paid Family Leave Taxes
It’s not necessary for our brokers to become tax experts in order to offer PFL insurance as a rider to DBL. If your clients have specific questions about taxes and PFL, they should speak with a tax professional.
It is important, however, to recognize opportunities to show your clients the cost-savings they can enjoy with private benefits in states like New York.
We suggest encouraging clients to review their books and their total spending for employee benefits, including the number of lives in their organization. Then, The DBL Center can help you provide a quote with private disability and family leave insurance in New York and other states that provide the choice.
With the cost savings they realize by privatizing these required benefits, your clients can put together an impressive employee benefits package that includes important ancillary benefits like group life / AD&D, dental and vision coverage.
Depending on the savings, employers can choose to fund these benefits for employees, share the costs, or offer them as a voluntary, employee-funded benefit. The DBL Center can help more of your clients privatize required benefits and save money while increasing your broker commission. Contact us today.